Where others fear to tread
A Massachusetts hospital is pressing forward with plans to borrow and build, despite what many expect to be lean and disruptive years ahead for healthcare.
Later this month, Lowell General Hospital will ask investors to provide $90 million in new debt and refinance another $25 million. Some of the deal will be financed using bonds considered higher risk since the credit crisis. The project, once finished, will add more hospital beds and operating rooms to the 186-bed hospital, which is located roughly 30 miles outside of Boston.
Lowell General's plan to increase hospital capacity comes despite concerns that health reform will shrink hospital margins and demand for hospital care in favor of greater prevention and more ambulatory care.
The deal also includes $56 million in short-term debt, known as variable-rate demand bonds. Those instruments have grown less popular among hospitals after the credit upheaval left borrowers exposed to the risk of higher interest or a disappearing market for the bonds.
Susan Green, Lowell General's chief financial officer and vice president of finance, said the capital project is necessary and its short-term debt is better protected against risks that soured others on the variable-rate bonds.
Lowell General has the opportunity to expand, which Green credits to more doctors who practice at the hospital, investment in services that generate revenue, and a five-year contract with doctors and Blue Cross Blue Shield of Massachusetts, which began in January 2009, for a global payment that includes financial incentives for efficiency and quality. Green said the global payment deal, which took 18 months to negotiate, has helped Lowell General retain patients who might have previously been referred to Boston for services.
Green noted that the hospital scaled back its plan to include a more modest lobby, cut out three floors of private rooms, and reduced the new operating rooms to three from six. The scaled-down project will add 33 beds and includes two floors of private rooms.
Moody's Investors Service said Lowell General reported an 8.6% increase in patients admitted to the hospital in 2009. Analysts said the growth comes “at a time when many other providers have experienced flat or even negative utilization trends.” Moody's also said Lowell General's operating margins improved last year and the hospital gained more of the market from Boston and nearby competitors.
Nonetheless, Moody's lowered its rating one notch to Baa1 and said the new debt significantly weakens Lowell General's balance sheet and adds risk with the use of variable-rate bonds and swaps, or deals that seek to hedge borrowers' interest rates. Distress among banks has left analysts more wary of short-term debt.
Swaps drained cash from balance sheets during the credit crisis. Green said Lowell General entered into the variable-rate bond and swap deals only after securing terms to avoid pitfalls that caused balance-sheet stress, including provisions allowing Lowell General to pull out of the swap while not granting the hospital's bank the same easy exit. The hospital also secured a five-year bank pledge, or letter of credit, for the bonds.
